Opinion

France and Germany: a moment of truth

France and Germany, which together account for half of euro-area GDP, are rightly considered the key to the euro area’s exit from the current impasse of low growth, falling inflation and increasingly dangerous debt trajectories. But more importantly, the German-French couple is a clear example of the need for a coordinated strategy.

By: and Date: November 25, 2014 Topic: European Macroeconomics & Governance

France and Germany, which together account for half of euro-area GDP, are rightly considered the key to the euro area’s exit from the current impasse of low growth, falling inflation and increasingly dangerous debt trajectories. But more importantly, the German-French couple is a clear example of the need for a coordinated strategy. Their unit labour costs have diverged by some 20% since the introduction of the single currency. This would not necessarily be worrying, but the world market share of French exports has fallen by more than twice that of Germany, and the current account gap has increased by more than 8% of GDP. France has not compensated for its rising costs by higher non-price competitiveness, while the German low-cost strategy has made the country more and more dependent on foreign markets. 

The German-French couple is a clear example of the need for a coordinated strategy

The steady decline in inflation and the increase in the euro area’s current-account surplus are an indication that aggregate demand is too low in the euro area and in France and Germany. The stagnation of total factor productivity since the mid-2000s in several euro-area countries (including France) is an indication that deep reforms are needed for long-term growth to restart, and therefore for the sustainability of social systems.

To break out of the current economic impasse, a bold, coordinated Franco-German strategy is needed. It requires simultaneous implementation of measures in both countries.

Currently, there is no political consensus in France for far-reaching reforms that would encompass structural spending cuts and changes to some services market regulations, and would also improving the functioning of the labour market. This could be done, for example, by reconsidering the labour contract in order to incentivise long-term hiring, or averaging working time across the year, rather than week by week, which would be a smooth way of reducing unit labour costs. There is also, so far, no consensus in France on the need for education system reform. Such reforms would boost French productivity growth, stimulate innovation and also help to narrow the unit labour cost gap with Germany.

Before the full gain from productivity can be reaped, wages and other costs such as housing will need to grow more slowly in France than in Germany, so that the former can regain competitiveness and the latter can alleviate its excess dependence on external demand.

Germany should gear its efforts to boosting its own economic activity. Boosting domestic demand is part of the answer and could be quickly achieved through lower taxes on low-income households and a credible strategy for public investment. For this, accepting that the “black-zero” balanced budget must be given up is essential. But structural reform to develop the non-traded goods sectors, for example IT services, is also essential. The introduction of a minimum wage next year increases the need to focus on such high value-added sectors. The education system should support a shift to the new growth sectors of the 21st century, where Germany is lagging behind. This renewed economic dynamism needs eventually to lead to an inflation rate of above 2 percent, which is required to support the rebalancing.

With the prospect of an increase in demand and inflation in Germany, the French government would have more leeway to cut social contributions and social spending, and to implement far-reaching structural reforms. The French government’s recent announcements of reforms to protected sectors, although going in the right direction, will not be sufficient. Aggregate demand is not only a question of fiscal stance. France needs to reduce the uncertainty surrounding future policies, which is currently a powerful drag on private investment. Clarifying the future path of tax rates and energy and carbon prices is one issue. Agreeing on a number of medium-term fundamental objectives covering issues such as vocational training, tertiary education, lifetime working hours, the health system and housing subsidies, are needed to anchor expectations. Credibility, through political agreement on medium-term objectives is needed to trigger private investments.

The success of such a joint strategy will of course depend on what happens at euro-area level

The success of such a joint strategy will of course depend on what happens at euro-area level: on the ability to finance European Commission president Jean-Claude Juncker’s €300 billion investment project with fresh money, on the willingness of the European Central Bank to do what it considers necessary to meet its target of an inflation rate “below but close to 2 percent”, and on the ability of the European Commission and the European Council to enforce the fiscal rules without suffocating the economy. France and Germany have a major responsibility as shareholders in the European Investment Bank and as direct participants in the European Council. But, equally importantly, they have a responsibility to reduce the structural divergence between them by introducing coordinated deep economic reforms at national level. 


Republished with permission from Le Monde


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More on this topic
 

Blog Post

Government-guaranteed bank lending six months on

In March and April 2020, European governments announced massive credit support programmes. After an initial surge, take-up appears to be stabilising (with a lag in Italy), despite second wave shocks in some countries. More recent data confirms that fiscal capacity has not visibly constrained national governments in the support they have provided so far.

By: Julia Anderson, Francesco Papadia and Nicolas Véron Topic: European Macroeconomics & Governance Date: September 29, 2020
Read about event More on this topic
 

Past Event

Past Event

From playing field to player: Europe’s strategic autonomy as our generation’s goal

At this online event Charles Michel spoke about the importance of Europe's strategic autonomy.

Speakers: Charles Michel and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 28, 2020
Read article More on this topic More by this author
 

Blog Post

Will European Union countries be able to absorb and spend well the bloc’s recovery funding?

To help finance the post-coronavirus recovery, the European Union is raising large amounts to pass on to its members. But absorption of EU funds is typically slow and some countries might struggle to spend what they can get, even if they will have broad freedom to design spending programmes. The focus should be on worthwhile spending, not just on absorbing EU funds.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: September 24, 2020
Read article Download PDF
 

External Publication

How Can the European Parliament Better Oversee the European Central Bank?

This paper, written at the request of the Committee on Economic and Monetary Affairs, assesses how the European Parliament holds the European Central Bank accountable. The same exercise is done for the Bank of Japan, in order to identify possible lessons for the ECB and the European Parliament.

By: Grégory Claeys and Marta Domínguez-Jiménez Topic: European Macroeconomics & Governance, Global Economics & Governance Date: September 23, 2020
Read article Download PDF More on this topic More by this author
 

Policy Contribution

Why has COVID-19 hit different European Union economies so differently?

All European Union countries are undergoing severe output losses as a consequence of COVID-19, but some have been hurt more than others. Factors potentially influencing the degree of economic contraction include the severity of lockdown measures, the structure of national economies, public indebtedness, and the quality of governance in different countries. With the exception of public indebtedness, we find all these factors are significant to varying degrees.

By: André Sapir Topic: European Macroeconomics & Governance Date: September 22, 2020
Read article More by this author
 

Blog Post

Unpacking President von der Leyen’s new climate plan

European Commission President Ursula von der Leyen has set a new destination for EU climate policy: a 55% emissions reduction by 2030. This is a good and necessary step on the way to climate neutrality by 2050, but getting there will not be easy, and Europe should prepare for a bumpy road ahead.

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: September 16, 2020
Read article More on this topic More by this author
 

Podcast

Podcast

The State of the Union going forward

In the first Sound of Economics Live episode after summer we look at the State of the Union address delivered by Ursula von der Leyen.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 16, 2020
Read about event
 

Past Event

Past Event

The Sound of Economics Live: The State of the Union going forward

In the first Sound of Economics Live episode after summer we look at the State of the Union address delivered by Ursula von der Leyen.

Speakers: Giuseppe Porcaro, André Sapir, Guntram B. Wolff and Alicia García-Herrero Topic: Energy & Climate, European Macroeconomics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 16, 2020
Read article More on this topic More by this author
 

Opinion

Without good governance, the EU borrowing mechanism to boost the recovery could fail

The European Union recovery fund could greatly increase the stability of the bloc and its monetary union. But the fund needs clearer objectives, sustainable growth criteria and close monitoring so that spending achieves its goals and is free of corruption. In finalising the fund, the EU should take the time to design a strong governance mechanism.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 15, 2020
Read article Download PDF More on this topic
 

Policy Contribution

Financing the European Union: New Context, New Responses

With the European Union for the first time taking on debt to help finance the economic recovery from the coronavirus, new resources are needed to fund the EU budget. Various ideas have been floated – including a digital tax and a financial transactions tax – but the most appropriate new resource would be revenues from the EU emissions trading system, which could provide enough funding to repay the EU's coronavirus borrowing.

By: Clemens Fuest and Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: September 11, 2020
Read article More by this author
 

Podcast

Podcast

For a better, more sovereign Europe

Keynote address by the German Federal Minister of Finance Olaf Scholz at Bruegel Annual Meetings, 3 September 2020

By: The Sound of Economics Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: September 9, 2020
Read article More by this author
 

Parliamentary Testimony

Employment and COVID-19

Testimony before the Economic Affairs Committee at the House of Lords, British Parliament on Employment and COVID-19.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation, Testimonies Date: September 9, 2020
Load more posts